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Fischer says low inflation won't persist as job market heals

Federal Reserve Vice Chairman Stanley Fischer said stubbornly low inflation in the US won't persist with the economy near full employment.

PHOTO: BLOOMBERG

[WASHINGTON] Federal Reserve Vice Chairman Stanley Fischer said stubbornly low inflation in the US won't persist with the economy near full employment.

"A large part of the current inflation is temporary," Mr Fischer said in an interview on Monday with Tom Keene on Bloomberg Television. After the effects of cheaper oil and other raw materials dissipate, "these things will stabilize at some point, so we're not going to be as low as we are forever."

Mr Fischer's remarks indicate that while he's pleased with progress on employment, he may be waiting for signs inflation will start moving up toward the central bank's target. The Federal Open Market Committee meets Sept 16-17 for a gathering at which many investors and economists expect it will raise interest rates for the first time in almost 10 years.

Traders were pricing in a 50 per cent probability that the Fed raises rates at the September meeting as of 8:43 am New York time, based on the assumption that the effective federal funds rate will average 0.375 per cent after liftoff. The odds were 54 per cent late Friday.

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In their statement after their July meeting, Fed officials said they believe an increase will be warranted once there has been "some further improvement in the labor market." A Labor Department report Aug 7 showed employers added 215,000 jobs last month, in line with the 211,000 average monthly gain so far this year. The jobless rate held at 5.3 per cent, average weekly hours inched up and the underemployment rate edged down. The August jobs report is scheduled to be released Sept 4.

Mr Fischer, a former head of the Bank of Israel, acknowledged that inflation had become the greater concern for policy makers.

"The problem is not with the part that's unusual in the dual mandate, namely employment, that's doing just fine," Mr Fischer, 71, said. "It's with the inflation part." The Fed is looking for signs that inflation will strengthen toward its 2 per cent goal before it starts to increase rates. Policy makers' preferred gauge of prices has been below target for more than three years, climbing by 0.3 per cent in the year through June.

"The concern about the situation is not to move before we see inflation, as well as employment, returning to more normal levels," Mr Fischer said.

Laura Rosner, US economist at BNP Paribas in New York, said Mr Fischer's focus on inflation was surprising given that Fed Chair Janet Yellen has said the Fed can tighten before price pressures actually reach their target.

Mr Fischer's "emphasis on inflation was very interesting - coming after an employment report to say firmly that the problem is not with employment, the problem is with inflation," she said.

Mr Fischer also said the Fed's "ultra-accommodative" policy over the past several years had worked.

"The low interest rates are designed to help the recovery," he said. "In terms of employment, they've done that very well."

Mr Fischer said the Fed takes international economic developments into account, but its first responsibility is to tend to the US.

"Our duty specified in law is to the American economy," he said. "Of course, what happens abroad affects us. If the rest of the works is slower, that's not good for the US economy."

Ms Yellen has said an increase will probably be appropriate this year if the data evolve as expected. While the October FOMC meeting isn't followed by a Yellen press conference, she has said a policy move is possible at any of the committee's meetings.

Dennis Lockhart, president of the Atlanta Fed and a voting member of the FOMC this year, told the Wall Street Journal in a story published last week that it would take a significant deterioration in the data to convince him not to begin in September.

St Louis Fed President James Bullard told the Journal in late July that "we are in good shape" for a rate increase in September. Bullard votes on policy in 2016.